Changes on the Way for FHA Condominium Certification Process ?
The Housing Opportunity Through Modernization Act (H.R. 3700) was signed into law on July 29, 2016 with the intention of reforming the Federal Housing Association (FHA) loan program for community associations. The FHA serves to insure mortgages and because of that, it has to be attentive to risk, said Philip Sutcliffe of Project Support Services in Lansdale, Pennsylvania, a company that assists condominium associations with FHA certifications and recertifications. He explained that the FHA’s policy is to insure loans in communities that offer a reasonable expectation that the loans are going to get paid on time.
“If an association has difficulty paying its bills or budgeting properly, this can lead to having to add special assessments or borrow money,” Sutcliffe said. He noted that each individual unit owner is then affected in the form of increased maintenance fees, which subsequently raises their possibility of default on their mortgage.
Therefore, the reason condominiums are treated differently by the FHA than single family housing is because they want to ensure an association is healthy before insuring any mortgages within the community, said Sutcliffe. In fact, in order for a prospective buyer of a condominium unit to be approved for an FHA-insured mortgage, the community must first meet certain requirements and complete a certification process.
Sutcliffe explained that some of the proposed changes in H.R. 3700 aim to lessen the restrictions for community associations to become certified. H.R. 3700 outlines four main areas where changes are to be made with regard to condominiums. These areas include mixed use properties (with residential and commercial properties in the same community), recertification, owner occupancy and transfer fees.
Sutcliffe said that H.R. 3700 provides direction and recommendations for the proposed changes; however, the specifics surrounding the changes are currently being discussed between the Department of Housing and Urban Development (HUD) secretary and appropriate parties to determine what action will be taken.
With regard to the issue of mixed use properties, the current FHA rules limit the amount of commercial space to 25% of the property. According to Sutcliffe, H.R. 3700 suggests increasing the amount of allowable commercial space but doesn’t specify how much. He noted, however, that there are already provisions in place to increase the allowable amount of commercial space in an established project. “Under current HUD guidelines, through their mortgagee letter, there are already provisions to allow for an increase in the allowable commercial space from 25% to 35% with very little other than ‘please ask,’ and if you ask you’ll be granted that waiver,” said Sutcliffe.
There are also provisions to go from 35% to 50% of commercial space, which to do so requires some more in-depth information. Sutcliffe speculated that perhaps the changes might lessen some of those additional requirements, but this is not known for sure. He said loosening up in the area would be beneficial for associations.
On the other hand, this does not apply to new construction, which may be one area where changes will be made, Sutcliffe said. He explained that under current FHA guidelines, new construction projects that have more than 25% of non-residential space will be deemed ineligible for FHA. Since mixed use properties are standard now in many areas, Sutcliffe would support a change to increase the allowable commercial space for new construction.
Regarding the matter of recertification, Sutcliffe noted that H.R. 3700 proposes an increase in time between recertification applications, but doesn’t specify how much time. He explained that under the current regulations, an approved condominium project has to be resubmitted for recertification every two years. Sutcliffe said he is not sure how much additional time is up for discussion, but thinks lengthening it is an advantage for associations. “It certainly takes some of the paperwork pressure off of a management company or condominium board,” he said.
However, Sutcliffe does not believe the additional time between recertification applications should be too much because HUD requires current budget information to determine the health of an association.
Sutcliffe also mentioned that H.R. 3700 proposes simplifying the recertification process, which he hopes will go in the direction of lessening some of the required information. For example, under current regulations, there is a list of items that must be provided and if any items are missing, the project will be rejected. In some cases, the missing item may have nothing to do with the risk associated with the project, Sutcliffe said. Therefore, he would like to see a little more reasonableness as to what is important and more flexibility when the item missing is mundane or unimportant. “Determine what’s an absolute and what, if we don’t have it, won’t impact the risk of the project,” suggested Sutcliffe.
On the matter of owner occupancy, the current guidelines for established communities state that at least 50% of the units within a project must be owner occupied. H.R. 3700 suggests reducing the owner occupancy requirement. According to Sutcliffe, it is commonly thought that unit owners will take better care of their units in order to see the values go up, while investors may be less likely to want to pay for improvements because it lowers their return on investment.
“Lowering the owner occupancy in an established project means that FHA would be insuring loans in a project that is predominantly investor owned and doing so would increase the risk to FHA,” said Sutcliffe. “I don’t think that’s wise.”
He explained that the FHA’s new construction guidelines already have a 30% presale owner occupancy requirement; however, these projects cannot allow the number of investors to exceed the number of owner occupants.
When it comes to transfer fees, the FHA currently prohibits them; however, Sutcliffe said he hasn’t had a client deemed ineligible because of transfer fees in the past few years. He explained that transfer fees typically amount to two months of assessment fees that a potential buyer pays at closing to a condominium association as a working capital contribution. “Transfer fees are common and customary but must be reasonable amounts, and must be made payable directly to the condo association” Sutcliffe added.
At this time, Sutcliffe suggests that if an association is ineligible for the FHA program under current guidelines due to something within its control, then it should work on getting that thing under control. “Prepping for the changes is pure speculation because we don’t know what the results of the new law are going to be,” he said, adding that his advice would be to “stay tuned.”
Until the new regulations are in place, the current FHA guidelines must be followed, Sutcliffe explained. Just recently FHA issued ML 2016-13 which extended the current guidelines already in place until August 31, 2017. Any changes made as a result of HR3700 that occur before expiration of this temporary extension will be made known by FHA in a separate announcement. He recommended that an association applying for FHA certification or recertification hire a professional who is knowledgeable about what is needed to comply with the requirements.